The notion that providing short-term credit equals a risky investment deters many credit unions from offering payday loan alternatives. Consequently, credit union members are often forced to seek outside help for loans that keep them afloat in hard times.
These concerns, which stagnated the growth of some programs and kept other financial institutions out of the short-term market completely, are not altogether invalid. Yet many credit unions have adopted strategies that decrease or eliminate these risks and prevent delinquencies, without sending members out to the wolves. Here are FOUR WAYS credit unions generate success and avoid losses in their short-term credit program.
1) Collect a moderate yearly fee for loan usage. It provides insurance to cover any defaults or delinquencies that might occur without resorting to the predatory APR rates of competitors.
2) Include a direct deposit requirement in your short-term loan program. When payday funds come directly to the credit union, delinquency and default become distant memories.
3) Provide financial counseling. For repeat loan users, financial education will help them address their monetary issues before they turn into delinquent members.
4) Structure the program so that it becomes a vehicle to break short-term credit dependence. Create a savings account for a percentage of the loan, give loan amounts an annual limit, or do not fund a subsequent loan until the member completely pays off the first one.